Overdraft is a financial mechanism in which the funds could be withdrawn from the current or savings account, even if the account goes below zero. It is a kind of extension of the financial limit provided through banks and that money is held to be ‘overdrawn’. An authorized overdraft maximum is assigned for each user relying on their association with the bank. The user could withdraw money up till the assigned limitation. Banks do charge te rate of interest on the money withdrawn in the form of overdraft.
Overdraft Account Eligibility
The different forms of overdraft accounts have diverse eligibility conditions for the facility and some of those standards include:
Overdraft against Salary: Salary accounts that are opened by the companies for their workforces are qualified for this facility. The minimum condition for availing an overdraft facility in a salary account is to have regular monthly salary credit through the corporation and the corporation being in the approval list of the bank.
Features
• Banks gives overdraft up to 3 times of current salary of the user
• The facility is provided at minimal documents and easily repay feature
• The users are required to pay interest only on the utilized amount with the freedom towards repaying the sum anytime without pre-closure charges
• The minimum salary limit differs from Rs. 15,000 to Rs. 25,000 as per the specific banks
• This kind of overdraft doesn’t need any security or collateral
• Few banks even offer an overdraft sum of up to Rs. 4 lakh
Overdraft on Savings Account: Irrespective of being a relatively new conception in the nation, overdraft on saving accounts has to turn out to be quite prevalent owing to being backed through the government. All the savings accounts that are opened under Pradhan Mantri Jan DhanYojna are entitled to an overdraft of Rs. 5,000 or four times monthly accent balance (whichever is lesser). The accounts should be satisfactorily functioned for a period of 6 months towards availing this facility and only one member of a family is qualified for it. The facility is approved towards the earning member of the family, preferably females. The account should be linked with Aadhaar card. This is an additional compulsory norm towards availing the facility.
The account holder should have additional savings account for compliance with the Reserve Bank of India directive as well. Minors, as well as Kisan Credit Card individuals, are not qualified for the scheme. There is also a renewal fee which is associated with the facility. However, the rate of interest cannot go beyond 2% above the base rate. This facility doesn’t attract any processing fee.
Overdraft against Time Deposits: Time deposits, like fixed deposits, are also entitled to an overdraft facility. Though, not every bank offers this facility as this is subjected to the bank’s policy only. SBI provides an overdraft facility against time deposits. All the users having single or joint time deposits, for example, TDR/STDR and RD which includes NRE/NRO/RFC in any of the SBI branches are entitled to this facility. The users could also apply through Internet banking for TDR as well as STDR overdraft.
Through Nil processing fees, the minimum sum overdraft is kept at Rs. 25,000 while the maximum sum is Rs. 5 crores. The worth of the overdraft cannot go beyond 90% of the value of the time deposit. The rate of interest is kept at 1% above the relative time deposit rate. The repayment time is scheduled according to the repayment capacity of the borrower as well as the sum of overdraft. Furthermore, repayment time for TDR and STDR ranges from 3 years to 5 years. SBI doesn’t charge any processing fee and prepayment charges also. This kind of overdraft is also known as a secured overdraft.
Types of Bank Account Overdrafts
The two kinds of bank account overdrafts are authorized and unauthorized overdrafts.
1. Authorized bank overdraft
Through an authorized overdraft, the procedure is made well in advance among the account holder as well as their bank. Both the parties agree towards a borrowing limit that could be utilized on all normal payment methods. However, the arrangement comes with a service fee that differs from bank to bank.
Generally, the fee is charged daily, weekly, or monthly, as well as the interest, which could be as higher as a 15% to 20% annual percentage rate. In view of very high fees, and overdraft arrangement could be very costly, particularly if the borrowed sum is very small. That is why account holders must be very careful relating to avoiding overdrafts, even authorized ones.
2. Unauthorized bank overdraft
An unauthorized bank overdraft means that overdrafts were not been agreed upon in advance as well as the account holder has spent in excess of his account’s remaining balance. Unauthorized overdrafts could also occur even if there has been a previous agreement, in case the account holder has gone beyond the agreed overdraft sum. The Unauthorized bank account overdrafts charge higher fees, which makes them more costly.
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